Apurva Agarwal

Managing Partner at Universal Legal

The Covid-19 crisis worldwide has proven to be an economic crisis for India. The restrictions on movement of persons and goods, except for essential services, has led to inability of parties to perform their obligations under contracts when these are not ordinarily classified as ‘essential services’. Due to this, the parties are envisaging enforcing the force majeure clauses.

FORCE MAJEURE CLAUSES IN CONTRACTS

‘Force Majeure’ means an “event or effect that can be neither anticipated nor controlled . . . [and] includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).”[1]

Most Contracts provide for a force majeure clause which specifies the events that qualify as force majeure events such as, acts of god, wars, terrorism, riots, labour strikes, embargos, acts of government, epidemics, pandemics, plagues, quarantines, and boycotts. Even if such event is not specifically mentioned in the force majeure clause, many force majeure clauses contain a catch-all phrase that is in addition to the specifically mentioned events.  A catch-all phrase would have similar language to “including, but not limited to” or “any cause/ event outside the reasonable control of the parties”. Although such catch-all language is construed ejusdem generis[2], depending on the width of the language of the catch-all phrase, it could be argued that an epidemic/ pandemic like Covid-19 falls within the ambit of the force majeure clause. Even otherwise if  ‘Act of God’ has been specifically included as a force majeure event, it can be contended that an epidemic like Covid-19 is an ‘Act of God’.

PANDEMIC = ACT OF GOD

Section 32 and section 56 of the Indian Contract Act, 1872 (“Act”) are relevant to Force Majeure and Act of God.

Section 32 of the Act deals with contingent contracts and inter alia provides that if a contract is based on the happening of a future event and such event becomes impossible, the contract becomes void. Section 56 of the Act deals with frustration of a contract and provides that a contract becomes void inter alia if it becomes impossible, by reason of an event which a promisor could not prevent, after the contract is made.

CASE LAWS

When the force majeure clause is not clear when the pandemic situation is covered under a force majeure clause, it can be argued that Section 56 of the Act can be applied for non performance since the epidemic is not relatable to the force majeure clause in the contract[3]. Further, the courts have clearly stated in Satyabrata Ghosh v. Mugneeram Bangur[4] that when a force majeure event is relatable to a clause (express or implied) in a contract, it is governed by Section 32 of the Act whereas if a force majeure event occurs dehors the contract, Section 56 of the Act applies.

CAUSATION AND MITIGATION

Even if a pandemic like Covid-19 falls within the ambit of a force majeure clause, that, by itself, would not relieve a party from performance of contractual obligations. The force majeure event must have a direct impact on the non-performance and the party seeking to rely on the force majeure event.

The judgment of the Orissa High Court in Sri Ananda Chandra Behera v. Chairman, Orissa State Electricity Board[5] provides some guidance on the causal link between the force majeure event and the resulting situation by citing, with approval, the decision of the House of Lords in Greenock Corporation v. Caledonian Railway Co[6]., where it was held that:

QUOTE

An accident may be an act of God if it has resulted directly from natural causes without human intervention.

It is true that in most cases human and natural agency co-operate to produce the result, but the immediate and direct cause is alone to be looked at in determining whether the act is that of God or man. When a ship is cast away in a tempest, this would not have happened but for the act of the owner in sending her to sea but the loss is the act of God for all that.

UNQUOTE

An instance where the performance of a contract may not be affected due to Covid-19 pandemic is where employees of an organisation in the service industry have to isolate themselves at home. Depending on the nature of the service, it could be argued that since employees can continue working from home, there is no impact on delivery of services. Similarly, any non-performance due to an economic downturn or other general business conditions resulting from the Covid-19 pandemic are not likely to be sufficient to seek excuse from performance of a contract on ground of force majeure.

The force majeure clause may require parties to take reasonable efforts to perform the contract by alternate means. Even in the absence of an express provision, the party seeking to rely on a force majeure event to excuse its non-performance will have to demonstrate that it was unable to perform its obligations despite having taken steps to mitigate the effect of the force majeure event.

In the matter of Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH[7], the House of Lords stated that despite the closure of the Suez canal (the customary route for shipping the goods from Africa) leading to a longer and more expensive shipping route around the Cape of Good Hope, that the contract was not fundamentally altered. The contract had become more onerous to perform but was not frustrated.

CONCLUSION

On March 11, 2020, COVID-19 was declared a pandemic. This affects all the sectors across the country and various countries’ economies. In this scenario, force majeure will be the determining factor to understand the significance of these circumstances. The scenario of India in case of force majeure will vary from case to case depending on the facts and circumstances of each case. Under Indian Law and English Law both there is no allowance to escape from any contractual obligation and any party still faces strict liability. So, force majeure and the doctrine of frustration play very crucial roles in non-fulfillment of performance of contracts.

REFERENCE

[1] Blacks Law Dictionary (11^th Edition, 2019)

[2] Md. Serajuddin v. State of Orissa AIR 1969 ORI 152; TGV Projects & Investments Pvt. Ltd. v. NHAI 2019 (173) DRJ 717; Steel Authority of India v. Mercartor Lines Limited MANU/MH/2070/2012

[3] Energy Watchdog v. CERC (2017) 14 SCC 80

[4] [1954] SCR 310; See also Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793

[5] 1998 85 CLT 79

[6] 1917 AC 556

[7] [1961] 2 All ER 179

After graduating from National Law School of India University, Bangalore, in 1999 Apurva Agarwal worked with Shah Desai Doijode & Phatarphekar. He was later offered a scholarship to pursue his LLM (Corporate and Commercial Laws) at Bond University, Australia where he achieved academic distinction when his name appeared on the Deans List. On completion of his LLM he returned to India where he worked for DSK Legal (formerly Andersen Legal India) and Luthra and Luthra Law Offices. He now has his firm in the name of Universal Legal. His articles have been published in various newspapers and magazines.

Specialties:

• Real Estate
• Corporate and Commercial
• Media
• Banking
• Dispute Resolution
• Succession Planning

He has have also recently been appointed as a sole arbitrator in a few matters. Sitting on the other side of the bench is a fascinating experience